The Third Biggest Commitment?
Folklore decrees that a family’s greatest financial lifetime outlay is a home, the second a car and the third? Leaving aside those that fund a private education for their children, the third is often home insurance. If you pay £200 to £1,000 a year for buildings and contents insurance it will amount to £10,000 to £50,000, ignoring indexation, of your hard-earned, tax-paid income being spent over a period of fifty property-owning years.
How much research did you put in before you bought your home? How many brochures or car showrooms did you check out before you chose your car? In comparison, how much do you know about your home insurance cover? Most people accede to a building society or banks ‘request’ that they take out a policy when they arrange a loan. Insurance at that point is a minor irritation and of little concern when the whole meaning of life is concentrated on exchange, completion and moving into a new home. Such lenders can take advantage of that abstraction and some will apply rates that are twice as high as available from other sources. This is not dishonest, after all they are only giving you their standard rate and no legislation decrees that they must tell you what the opposition offers. They also overlook the fact that you ought to know full details of what you are getting for your money, something that this article aims to put right.
The most basic point here is that you need to insure for rebuilding value, and that must include an allowance for site clearance, architects and local authority fees and take into account outbuildings and garden walls. Don’t make the classic mistake of insuring your home for the amount that you paid for it. If you do this, you can be inviting problems. For one, you can be paying too high a premium if the rebuilding cost is lower than the amount you paid for your home.
A two-bedroom mews cottage just off Mayfair has the same number of bricks and tiles as a similarly sized house in Merseyside, the Mayfair property might cost £500,000 to buy, the Merseyside one £30,000 but they will need a comparable amount to rebuild, say £35,000. You might need to add a slight London weighting, perhaps £5,000 at tops but that’s all. The opposite situation, underinsuring, can also be problematical and is a particularly dramatic for owners of listed buildings. If you underinsure and your policy has an ‘average clause’ then any claim will be reduced by the amount of under insurance. A £10,000 claim could be reduced to £5,000 if your sum insured is 50% less than a loss adjuster calculates your rebuilding cost to be. An £80,000 total loss may have you scrabbling round for a £40,000 second mortgage. More serious consequences threaten listed building owners, often the values are higher giving more room for error plus the fact that if the insurance falls short they don’t have the option of using cheap alternative materials and accepting a lower standard rebuild. Legislation will ensure that the property is rebuilt with traditional materials, by traditional craftsmen, despite the cost and the limit of insurance cover. There have been cases where properties have been totally rebuilt, sold to cover the costs and the then homeless ex-owner sent a bill for the balance.
So how do you work out the right figure? Many insurers will supply you with the Rebuilding Cost Table supplied by the Information Service of the Royal Institute of Chartered Surveyors or you can get a copy from the Institute. They are available free on request and this offers a quick and easy guide to working out the approximate sum insured. If you’re not confident to do it yourself you can pay for a professional rebuilding cost valuation. Ask friends if they have a personal recommendation or try the Yellow Pages and locate someone with experience on your type of property. In some cases your insurance company will send their own surveyor, free of charge, to calculate the value. This normally only applies to higher value properties of £200,000 or more and only to some insurers but a phone call to your own company will soon clarify the situation. At the same time use the opportunity to check if your policy has an average clause, some don’t and others will agree to delete the wording if you supply a written rebuilding cost valuation.
There are two types of cover, standard and standard plus accidental damage (AD). Both include major ‘perils’; fire, aircraft, explosion and ‘wet perils’ but taking the accidental damage option means that you can also claim for damage that you cause, accidentally, to your home. However, before opting for AD cover, or renewing your policy on that basis, make sure there is an event that you could claim for to justify the extra premium.
Under standard cover you will already have accidental damage cover for fixed glass, sanitary fitting, cooking hobs and more so what will the extra give you? After a searching discussion in our office we decided that putting your foot through the ceiling would be covered under standard plus AD, but not under standard, that was about it. Most policy booklets give details of both types of cover so dig out the policy document and read it, check what cover you have and what is covered. Can’t be bothered? Remember your going to pay at least £10,000 over the years, you ought to know why.
You can reduce your annual premium by opting for a higher excess. The standard excess is usually £50 but if you are the type of person that wouldn’t bother to claim for £100 or even £500, get your insurers to calculate the premium with a range of excesses. Pick the one that offers the most economical discount and fits in with your claim expectations but remember, that amount will be deducted from every future claim.
Most policies carry an indexation clause that means the sum insured throughout the policy term will increase in line with the House Rebuilding Cost Index produced by the Royal Institution of Chartered Surveyors. This is applied monthly so you benefit from an increasing sum insured with no additional charge during the year. The renewal premium, however, will increase as it will be based on the previous year’s sum insured plus a full years indexation. Don’t rely on this clause to provide the correct sum insured forever, even if the original figure was from a professional valuation. Independently check the rebuilding costs at least every ten years and amend the cover as required. This check will also pick up any extensions or outbuildings you may have built and forgotten to increase the sum insured to allow for them.
The Perils of Home Contents Insurance
Many people see contents insurance as a necessary evil. Something that should be purchased at the lowest possible cost to provide for a level of cover that sprang to mind as the question was asked or the application form filled out. If you arranged your policy on this basis – think again. Your home contains everything you have worked for and purchased in your lifetime. You can’t insure for sentimental value but are you certain that the level of cover you have now will enable you to replace, at current costs, everything in your home? If your ‘sum insured’ is too low you may be saving a few pounds a year but have the potential to lose thousands.
Getting the right cover
The only way, save for paying for a professional appraisal, of establishing the right level of contents cover is to look at every item in your home and estimate the new replacement cost of it. It is a laborious task, even boring, but there is simply no other way. The job means looking at everything in each room, opening every cupboard, getting into the attic and noting the value of the all you own and don’t forget the equipment in your garage or outbuildings. The total replacement value will surprise you if you have never carried out the exercise before, some homeowners may find that they need to double their existing cover value. Once done, unless you buy or sell any of the contents, the automatic index linking of the value to the Retail Price Index by your insurer will keep the values up to date. If, for some reason, you have over-insured, it will also an opportunity to correct the situation and save you some money.
Our office often receives enquiries for quotations. One worrying reply to the question of “What sum insured to you wish to cover?” is “I don’t know, it’s a four bedroom house, what’s the average?”. There is no average home! Some people rest their black and white TVs on orange boxes, other position their wide screen quadraphonic video and sound centre on the Chippendale sideboard inherited from their Granny, everyone is different. You have to check your values for yourself.
Now that you have the correct figure to insure, how do the insurers work out a premium? The major rating factor is your geographical position, located by the first five alphanumeric digits of your postcode. Modern computer systems allow companies to build a database of locations, by claim frequency, that are prone to theft or flooding, The greater the historic incidence, the higher the area load will be. Fire, being a rarer event, cannot be so easily geographically plotted. Next construction. If a building is built of anything other than brick or stone with a slate or tiled roof it is likely to be deemed non-standard construction and dependent on type insurers will either agree normal terms, apply a load or simply decline the risk.
The excess (the amount that is deducted from every claim) you wish to take is then taken into account. Most policies have a basic £50 excess for all sections of cover which is applied to prevent companies being swamped by small claims which cost more to administer than is paid out. You can increase the basic excess in return for a discount, anything up to 20% for a £250 excess in addition to the standard, but that then means that a £300 excess will apply to every claim. Discounts for age are then calculated, the more ‘mature’ a policyholder is the less likelihood, statistically, of a claim.
The final consideration is previous claims. If you have a couple of minor claims within the past five years, most major insurers won’t worry about it and apply normal terms. Anything more than that and a new insurer will either apply a load or decline to quote. Staying with your existing insurer, if they will invite renewal, will then be you only way to remain insured until you are able to build up a claim free track record. Never be tempted to avoid disclosing any incidents, companies have a database of claims but they don’t bother to search it until they are faced with paying out a new claim. A non-disclosure could invalidate your cover.
Individual companies may give discounts for neighbourhood watch, a NACOSS approved alarm system, membership of some organisation or a no claims bonus. However any discounts or loadings are termed you should only take into account the extent of cover and the bottom line premium. Now you know what the insurance company is going to take into account, there are a few points that you need to consider.
There are two types of cover, standard and standard plus accidental damage (AD). Both include major ‘perils’; fire, aircraft, explosion and ‘wet perils’ but taking the accidental damage option means that you can also claim for damage that you cause, accidentally, to your home contents. However, before opting for AD cover, or renewing your policy on that basis, make sure you are ware of the differences in cover and as AD cover usually costs around 50% more, that the likelihood of a claim can justify the extra premium. Under standard cover you will already have accidental damage cover for fixed glass in furniture, mirrors, cooking hobs, radios, televisions, audio, video and computer equipment. The extra cover under AD will mean that you could cover for items that you drop and break, or if you spilt paint on the carpet but if you are the type of person that wouldn’t claim for this type of event you may be better off with the standard cover.
Most policy booklets give details of both types of cover so dig out the policy document and read it, check what cover you have and what is covered. Buy the cover that you need that suits your circumstances. Don’t just accept a policy that covers the ‘average’ household.
Often termed an ‘All-Risks extension’. This is additional cover that will provide you with compensation if an item is lost, damaged or stolen away from the home. Items like watches, cameras, clothing and jewellery can be insured in this way and cover is usually Worldwide. Most insurers will require valuations for items valued in excess of £1,500. The limit of cover you should have under this section is the maximum value of items that will be taken outside the home at any time. If you have £3,000 worth of jewellery but only ever take £2,000 worth out with you, then that is the limit you require. The other £1,000 worth left at home will be covered under the general contents. Insurance under this extension is expensive so don’t take more cover than you need.